Stress comes with the territory when you are running a small business and deeply invested in achieving success. However, if left unchecked, on-the-job stress can become counterproductive and potentially lead to costly mistakes. Prolonged stress has been linked to a wide range of health issues, including ulcers, diabetes, and heart disease.
While every small business has its ups and downs, managing cash flow is one of the most common – and stressful – challenges entrepreneurs encounter. A cash flow crisis can be triggered by any number of factors, from a shortfall in sales or late-paying customers to higher-than-anticipated expenses. Regardless of the reason, the resulting inability to cover day-to-day expenses can put the future of your business at risk. In fact, a study by the U.S. Bank reported that 82% of business failures are attributed to poor cash flow management.
Since April is National Stress Awareness Month, we’re offering our five top tips for improving your cash flow management. Addressing this primary source of anxiety can help you de-stress and focus more energy on growing your business.
1 – Manage Your Inventory
Having too much stock or too much cash tied up in slow-moving inventory can have a negative impact on cash flow. Evaluate what you currently have on hand and be objective. If there are products sitting on the shelves that only sell sporadically or you have excess inventory that has become obsolete due to a shift in customer demand, unload it. Even if you sell it at a discount, you’ll be able to use that cash to purchase items that you know will turn over more quickly.
Avoid buying inventory simply to stock up for future orders or purchasing a product in hopes that one day your customers may want it. It may end up taking a very long time to turn these goods back into cash.
2 – Increase Your Prices
As obvious as this strategy appears, it is often the most difficult step for small business owners to take. They typically worry that higher prices will scare off customers and result in lost sales. While this is always a possibility, there is no way to truly know without testing the waters to see what the market will bear.
Keep in mind that increasing the price of your products may also increase their perceived value, which could attract new customers. If your prices are too affordable, potential customers may have a negative perception of your quality relative to your competitors. The key is to find a price point that helps boost your cash flow without reducing sales.
3 – Examine Your Terms
If you’re having trouble with cash flow, take a hard look at the terms you’re offering to customers and how your customers are performing to those terms. Once you’ve pinpointed the trouble spots, consider implementing the following changes:
- Don’t offer extended terms. You want to get paid as quickly as possible, so avoid agreeing to extended payment schedules. This can be difficult to negotiate, especially with large companies that dictate their terms. However, if the impact on your cash flow will put your business in jeopardy, you need to seriously consider if getting their business is worth it. If it is, invest the time in finding a solution that works for both of you.
- Offer early pay discounts. Give customers a discount for paying their bills ahead of time. For example, if normal payment terms allow a 30-day period for remittance, offer a percentage discount if the invoice is paid within the first 10 days. This provides an incentive for customers to pay early and help you collect the cash you are owed.
- Assess penalties for late payments. Add interest to any invoice that has gone unpaid for too long. This can be beneficial if you find it difficult to follow up consistently with customers when they are late in paying.
As a best practice, send out invoices immediately following a transaction. Customers may be late in paying, but if you are slow to send the bill, it can put you further behind on collecting receivables.
4 – Negotiate Vendor Payments
Slowing the outflow of cash is an important aspect of any money management strategy, one that relies on maintaining both solid vendor relationships and a good credit rating. Staying on friendly terms with your most strategic suppliers will make it easier to negotiate better terms and discounts. It is also critical that you strictly manage delayed payments to avoid late fees and any damage this can cause to your credit.
Check to see how your suppliers’ terms compare to others in the marketplace. Ask your vendors to offer longer terms on inventory purchases to give you more time to pay invoices. For example, a 30-day delay will allow you to keep that cash and use it to cover other expenses, as well as give you a month’s head start in managing your cash flow. If your vendors are open to allowing you to delay payments in the short-term, consider having a discussion about renegotiating your payment structure for the long-term.
5 – Explore Financing Options
When you hit a rough patch and need working capital, small business financing can be a smart short-term solution. Whether you need to meet payroll, keep the utilities running, or pay your lease or mortgage, working capital financing can help you cover shortages and even out your cash flow.
Summit Financial Resources offers working capital loans for small to medium-sized businesses that involve using your accounts receivable and other assets as collateral. We can mix and match from a variety of flexible financing options, including invoice factoring, asset-based lending, inventory lending, and equipment financing.
We are not regulated like a bank, so we can respond quickly to the changing needs of your business and expand your cash flow in a matter of days or weeks, not months. We partner with our clients to help them reach their business goals, creating custom financing solutions with reasonable rates and structures that banks and other commercial finance sources cannot provide.
While you can’t avoid work-related stress, you can minimize it by improving your practices and processes. Managing cash flow is an effective strategy for reducing the stress that results from not knowing where your business stands financially. For those times when cash is tight, Summit Financial Resources can help you get what you need to keep your operations running smoothly.
Working Capital Financing is a few clicks away.
Summit Financial Resources specializes in working capital financing for small to medium-sized businesses that need increased cash flow. We provide working capital financing through invoice factoring, asset-based lending, inventory lending, and equipment financing.